Below is my amortization and random scribblings on an investment property

200k property, 40k down, 4.25% interest, 30 years fixed, 160k mortgage, all in expenses a month including mortgage, insurance, taxes, etc. is 1,400, rent is 1,600. This is not factoring in random fixes and what not because I don't see how that impacts the calculation. It's in another bucket of expenses but separate from this cash flow.

I then (probably screwed up here) assumed that those liabilities go up 2% a year, while rent goes up 4%. I initially thought the only thing that mattered was the differential of 2%, but that's not accurate. If we instead did 4 and 6, the #s would be almost 50% higher. Probably just a simple formula of 4/2 = 2 and 6/4 = 1.5 so an inverse gain of 50%, I don't know and I'm too tired to figure it out.

Point is, it doesn't make sense. There is NO WAY that in 30 years an initial investment of 40k is now putting out $2,740 a month, and then the very next month the mortgage is eliminated and it shoots up to $3,500 a month FOREVER.

..... right?

EDIT: Also realized that I have the mortgage included as an expense in that category, so it's growing at the 2%, but the mortgage is static. That means the growth is even more alarming

Didn't include the expenses because that goes in another bucket which I didn't describe well. Even if in one month I would need to pay for a repair, the rent would still be whatever it should be in that given month.

Vacancy would be harder to quantify, but almost the same idea as the maintenance, it would just be lower rent (none) instead of higher expense (the repair)

Didn't include the expenses because that goes in another bucket which I didn't describe well. Even if in one month I would need to pay for a repair, the rent would still be whatever it should be in that given month.

Vacancy would be harder to quantify, but almost the same idea as the maintenance, it would just be lower rent (none) instead of higher expense (the repair)

A bad tenant is a tenant that doesn't pay the rent and trashes the place. One example is my former up neighbours, who didn't ventilate the bathroom enough because it was in the middle of the house. Result was a whole lot of black mold. My estimate for the costs would be 2-3 k for that alone and that wasn't the only visible damage.

If you are going to consider this as a rental it is a business. A business that operates with costs and income, rather than income and expenses. The difference is costs are things that are written off that month, not necessarily expenses that go out that month. So you do have the put the % you assign for repairs aside every month, whether there is a repair that month or not.

A general rule of thumb is that approximately 50% of what you get as rent you can use for income/mortgage payments (see other thread inhere). Please look up some threads on this board.

Didn't include the expenses because that goes in another bucket which I didn't describe well. Even if in one month I would need to pay for a repair, the rent would still be whatever it should be in that given month.

Vacancy would be harder to quantify, but almost the same idea as the maintenance, it would just be lower rent (none) instead of higher expense (the repair)

Don't know what Cap Ex is

Don't know what you mean by bad tenant

*slams forehead repeatedly against wall*

Go read some books on real estate and come back.

-W

I am, as well as forums, where apparently my posts make people so upset they inflict physical harm on themselves for no logical reason.

ok look it's really hard to see 30 years into the future but your assumption that rent will grow at 4% and other expenses at 2% is causing the issue. 2% differential sounds small but compounded over 30 years is a massive difference (why do you think we talk so much about mutual fund fees???)

I would suggest keeping both at 3% growth and reworking your calcs. Forget inflation for now, try and keep it simple, and perhaps only look at it over 15 years.

Take 4 weeks rent off a year for nominal vacancy and allow for HOA fees or major repairs of $3k per year (whichever is higher). Add insurance, local taxes, water, property manager fees, and another $1000 a year for things like air conditioner maintenance, carpet cleaning, new sets of keys, blinds, curtains, gardening, plumbing repairs etc etc.

You say that maintenance and vacancy are a different bucket. Okay, but you still have to account for that. How can you "not see how that impacts the calculation? If you spend an average of $2500 per year on maintenance, that directly affects the bottom line, even if some years that is $200 and some years (when the roof goes and the fridge dies and the toilet stops up and needs a plumber, and you have to replace the carpet because it's 14 years old, and ...) are $7500. Likewise, if the place is empty for an average of 1 month every 2 years, that affects those rental incomes you have in your chart. (Even if you are in a super hot rental market right now where there are almost no vacancies, you certainly can't assume that won't change over the next 30+ years). You can't just dismiss very real expenses because you are mentally categorizing them differently, and because they are less predictable and evenly distributed over time. Why not declare that "taxes" are a different bucket, since they aren't paid monthly, either? Then you can delete those, too, and your numbers look even better! That makes no sense, right? Well neither does not counting maintenance or vacancies.

Also, where are you getting those 2% and 4% rates? Did you pull those from some kind of research, or just pick them somewhat randomly?

Do you live in a state where property tax increases are capped? If not, those could potentially go up at a far, far greater rate than 2%/yr.

ok look it's really hard to see 30 years into the future but your assumption that rent will grow at 4% and other expenses at 2% is causing the issue. 2% differential sounds small but compounded over 30 years is a massive difference (why do you think we talk so much about mutual fund fees???)

I would suggest keeping both at 3% growth and reworking your calcs. Forget inflation for now, try and keep it simple, and perhaps only look at it over 15 years.

Take 4 weeks rent off a year for nominal vacancy and allow for HOA fees or major repairs of $3k per year (whichever is higher). Add insurance, local taxes, water, property manager fees, and another $1000 a year for things like air conditioner maintenance, carpet cleaning, new sets of keys, blinds, curtains, gardening, plumbing repairs etc etc.

Now show us your results.

I took out the first month's rent of the year (4 weeks vacancy) then on the last month took out $4,000 for fees, also accumulating at 3% a year, and subtracted it from the rent to get a negative cash flow. End result is that I pay $40,000 up front to lose $24,750 over the next 15 years, which will then continue to grow as the expenses outpace the income.

So, obviously this is a good model (and accurate!) because everyone would be all over this fantastic opportunity.

Sulame66 you have a lot to learn about real estate, but it is good that you are starting early at 23. You haven't done a ton of research yet, but that is ok, you will learn. There is no better way to learn than from experience. (I am being sincere and not sarcastic.)

I see you are getting a lot of negative comments, and this may upset you some, but the other posters are right (except for being mean about how some things are worded.) I started in real estate at 25 and now I am 30 and getting closer to retirement (so congrats on starting even earlier!)

I will demonstrate why your numbers don't work with a simple example. This is an example of one of the properties I own (this is one of the least profitable properties, so I am not choosing the best one to brag or to give you unrealistic numbers.)All in cost 93k Rent $1,100 month

My conservative estimates on costs (this is specific to my area, yours maybe different:)$1400 taxes (current assessment is different than "All in cost")$550 insurance$1980 repairs (Only averaged $200 per year for the last 4 years, but room needed to be replaced and I spent $5,300)$1320 vacancies (haven't had any yet, but my tenant is moving out in July, so it will happen, and if it takes me a couple of months to rent it out then I will close to half that number for average over the years.)$0 mortgage (it is paid off now, but you can substitute your number here)

If I had a mortgage on this house my cash flow would be very close to zero, but this is one of my worst investment (my first house I bought for myself to live in.) The reason I am showing you all this is to show that rent-to-value is what determines your cashflow (the area and the quality of tenants in that area plays a large role too, but lets assume that both of our properties are in good areas, mine is.) My rent-to-value ratio for this property is 1.18% in percent and I make little cash flow (assuming I have a mortgage), and your rent-to-value ratio is 0.7%, which realistically will not cash-flow. Numbers just won't work out, no matter what you do, and I think you saw that in your last calculations. Most people in real estate (from blogs and podcasts and real estate meetups) have bare minimum rent-to-value ratio of 1%, and that depends on the market and the demographic of the area because some expect that ratio to be a lot higher than that.

Keep in mind that even at cashflow of close to zero you are paying off your principal, so your net worth is growing regardless, so it may not be a total loss. The property is more than likely appreciating as well, so your net worth is gaining not just by principle being paid off, but by principle and appreciation rate in your area. I think you are starting to realize that you need to learn a bit more, and I wish you luck on your journey. I wouldn't call myself an expert, but I am not a novice either, so if you have any questions, I would be happy to attempt to help.

I have no idea what a rent-to-value is, but there is absolutely nothing anywhere near me that would return $1,100 a month for a cost of 93k. And at that level, that property is barely profitable to you, and it also seems evident you're not using a property management company, which I need to.

Essentially, I'm trading dumping $750 a paycheck into my 401(k) where it will go up and down for 30 years (while I ignore it) and then hope it's valued at whatever the math turns out to be for an ~7% return over those 30 years for saving that $750 a paycheck for 120 weeks to get the $45k cash required to put a down payment on a property that I will see an actual in or outflow of cash each month as opposed to virtual money until I retire. Because of this I'll either win big and see all the benefits of a 401(k) investment except with the added advantage of getting the gains each month, or lose big and just go bankrupt by having to pay rent + a mortgage on a property I don't live in or use because nobody will move in. In other words, a crap chute like every other investment. Just something to toss money at because instead of dying off at 55 like my ancestors I get the privilege of living to 110 with no family or relatives while a nursing home caretaker changes my diapers and spoon feeds me liquefied carrots for the low cost of 250k a year that I worked my entire life to accrue but by virtue of saving never actually got to do anything with. And because working for 40 years while saving 40-60% of my income gives me a lower standard of living for just myself than working 40 years and saving 5% of my income would have provided for my entire family not even 50 years ago, I don't have any other option. But that's ok, because I guess I have a smartphone and a computer and a bigger TV so I'm clearly coming out ahead.

Have you actually read any of the blog here? Because investing 40-60% for 40 years is pretty fucking dumb. If you're for sure going to work for 40 years, and simply want to maintain lifestyle in retirement, go with a lower savings rate. The whole point of investing large sums like that is that you won't have to work for 40 years.

I make 62k. To hit the 18k 401(k) and 5.5k Roth 401(k) max, I'm looking at (18,000 + 5.5*1.25) / 62,000 = 40% of my income. This is also assuming zero debt, which isn't currently the case. And once the debt is gone, good debt will eventually be taken on, and paying that off is savings as well

And it isn't fear, it's annoyance that saving that much money is now a requirement to sustain myself until I die, which is either going to be in a car wreck tomorrow or at some indeterminate point within the next 60 years that the best actuary can't predict but I'm supposed to be able to

So you're angry that you're "required" to invest 40-60% per year for 40 years to "sustain yourself until you die". Who told you that? There is no such requirement. Lots of people save essentially nothing over their lives in this country and manage to live good, long lives.

People on this forum do invest that amount per year or even more, but it is so we can reach financial independence in 10-20 years or less, not work into our 60's and 70's and eventually die with 8 or 9 figure estates.

Dude, this is easily the best time to be alive in human history. You have a much better chance of living a long, healthy life than you ever would have even 50 years ago, and you'll need to work much less than you would have at any time in history to support yourself, too.

Focus on the positive. You are one lucky SOB. Go out and kick some ass and save up to do whatever it is that you want to do. Just don't buy any real estate that isn't 1%/50% rule compliant along the way!

So you're angry that you're "required" to invest 40-60% per year for 40 years to "sustain yourself until you die". Who told you that? There is no such requirement. Lots of people save essentially nothing over their lives in this country and manage to live good, long lives.

People on this forum do invest that amount per year or even more, but it is so we can reach financial independence in 10-20 years or less, not work into our 60's and 70's and eventually die with 8 or 9 figure estates.

1) Invest 5-15%, save the rest. Pay off the remainder of my debt within 6 months. Take 2-3 years to save a 20% down payment using projected real estate inflation in my area, then drop $45k on a $225k home. Pay off the $180k balance over the next 10 years or so, and have a paid off house with no other debt. Save another 10 years to get a large enough nest egg to retire early. All together, spending essentially nothing other than extra towards debt, we're looking at almost 20 years. Keep in mind I've been working for 5 already doing nothing but paying down debt and spending ~ 3% of my income a year on 'fun'.

2) Invest 40-60%, save the rest. Pay off the remainder of my debt within 12 months. Take 5-6 years to save a 20% down payment using projected real estate inflation in my area, then drop $50k on a $250k home. Pay off the $200k balance over the next 15-20 years or so, and have a paid off house with no other debt. Save another 3-5 years or so to get a large enough nest egg to retire early. All together, spending essentially nothing other than extra towards debt and investing for retirement, we're looking at 25-30 years. Keep in mind I've already been doing nothing but paying down debt and spending ~ 3% of my income a year on 'fun'.

Fantastic options. Or I could just continue to rent forever, have an excess of $2,000 a month with no clue what to do with it or what the point is, and save that for when I inevitably get cancer or diabetes at 42 and lose it all on a doctor bill. But, hey, at least I'm healthy and alive, right

Honestly, at this point, I might as well just get into a 4 bedroom house as quickly as possible, rent out the other 3 rooms, and just combine every idea in this thread

Have you read the MMM blog posts? Have you run the actual numbers in your first scenario? Would it really take you 10 years to save up enough for FIRE, with a paid off house? You'd be able to take all the money currently servicing your debt, and then all the money that was paying the mortgage (once it is paid off) and add that to what you were already saving. It seems to me like that should add up to a nice 4% stache pretty quickly. But without actual numbers, it's impossible to say.

Have you considered other ways to increase your income or reduce your expenses? Have you posted a case study?

Plenty of people make it to FIRE in far less time than you've come up with for your two scenarios.

I've run numbers twice and nobody cared so I'll just toss some out and wave my hands.

By the time I can get a 20% down payment the houses in the range I'm looking will probably be 250 (since I wouldn't be buying to rent out anymore, I'd go a little higher) if not 260. Property taxes at that level are around $450-$500 a month, and will continue to rise forever since real estate will continue to rise forever.

Before we even get to that, let's just figure out 4%. Well, CURRENTLY, $450-$500 a month averages to $5,700 a year. Let's add in another $175 for auto and home, that's $2,100. Can't forget food and gas and utilities which is probably around $400, that's $4,800. Without a job I'll be on some ridiculous health plan probably costing $300 or so a month, that's another $3,600. So far we're at $16,200 before I've even spent money on, you know, doing stuff since I'm FIRE. Let's be super conservative and say I only need $1,300 a year for whatever. That's $17,500 all in. At 4% that means my nest egg needs to be $437,500 in today's money. Using JUST inflation and moving out 10 years, which also means I'd have to be in the house TODAY, 437,500 * (1.03^10) = $587,963.4.

So with a whopping $42k in my 401(k), dumping everything into debt, then needing to save $50k cash money asap to get into a house and then throwing everything I have at the mortgage, I need to gain $540k in 10 years with a cap of $23.5k a year. Then I need to take the penalties since I'm not 59.5 when any of this happens. Now factor in that this is all delayed X years where X is how long it takes me to get into the house and pay it off, and we're looking at a long time.

But, as evidenced by everything I've ever posted, I know nothing about anything

A couple of thoughts:1. FIRE isn't easy. If it were, everyone would do it. Some in this forum make it sound easy, and some people earn 4x what you earn. That being said, make some sacrifices, work hard, and be creative, and it can work.

2. Your attitude is one of the worst ones I have ever come across. From your posts you seem like a spoiled, whiny 12 year old. I think you need to spend some time in a poor country to get some perspective on life.

Go post a case study in that subforum. You'll get lots of good advice on how you can be FI and you can figure out scenarios in lots of detail if you want to. There's a nice form you can fill out to figure out exactly what you're spending where, what your gross/net pay end up at, your assets, etc.

And seriously, if you don't like the answers, whining about your life isn't a great response. There's a lot of information and help available here, but nobody likes a crybaby. Your life does not (financially at least) suck at all compared with most of the world, or even most of the United States.